Canada seen beating U.S. in $150 billion Asia LNG race

“One of the things attracting us to Canada is that it’s already a natural resources exporting country,” Watson said during a meeting with reporters after his presentation to analysts. “We’ve decided that Canada is going to be the focus of our North American LNG efforts.”

Chevron agreed in December to buy a 50 percent stake in the Kitimat LNG project near the Douglas Channel project. The Horn River and Liard gas fields that will supply Kitimat may hold more than 50 trillion cubic feet of gas, Watson said, or enough to supply South Korea’s current level of imports for 29 years.

BG Group Plc, a U.K.-based producer of LNG from the Middle East and Caribbean, has proposed a gas-export project for Prince Rupert, British Columbia. Exxon, the world’s largest energy company by market value, also has said it’s considering LNG exports from the same area. Partnerships between AltaGas Ltd. and Idemitsu Kosan Co., as well as Cnooc Ltd. and Inpex Corp. are also studying projects.

Pricing Contracts

A key element of making Canadian LNG profitable will be multi-decade contracts indexed to world crude prices rather than North American gas, Watson said. Oil-linked prices are the only way to ensure enough cash flow to justify the expense and time involved in constructing LNG complexes that cost tens of billions of dollars, he said.

The LNG industry has used crude-linked prices since its inception a half-century ago in Algeria, Ernst & Young’s Nijoka said. Unlike gas, oil was a globally-traded commodity with transparent price-discovery mechanisms anyone could monitor anywhere in the world, he said.

Cheniere has bucked the rest of the LNG industry by basing contracts on the U.S. benchmark price from the Henry Hub pipeline nexus in Erath, Louisiana. The Henry Hub price has averaged $3.46 per million British thermal units this year, one- fifth the rate Japanese utilities pay for LNG imports from major sources such as Qatar and Indonesia, according to data compiled by Bloomberg.

Holding Out

Gas buyers in Asia and elsewhere probably will migrate to more Henry Hub-based pricing as existing long-term, oil-indexed contracts expire, Nijoka said. Energy producers will resist as long as they can to protect profits, he said.

“These companies like the idea of oil-based pricing because it gives them a lot more money, but the Asian buyers are pretty shrewd,” Nijoka said.

Despite the steep discount of U.S. gas to international prices, many Asian LNG importers may prefer to retain crude- linked contracts to avoid the volatility of domestic U.S. energy markets that can be roiled by hurricanes, winter storms and heat waves, said Betsy Spomer, senior vice president of business development at BG Group.

“Oil, as an index, has been robust for a long time, primarily because it’s a truly global commodity that is transparent and can’t be manipulated,” Spomer said at an LNG conference in Vancouver earlier this year. “You can’t find a coal index that has the same characteristics, and does Henry Hub really make sense in Tokyo?”